Yuan's slide, Korean nuclear test hit markets

Stephen Cauchi

A slide of China's yuan to five-year lows against the US dollar, coupled with jitters following North Korea's latest nuclear test put the skids under financial markets throughout the Asia-Pacific region Wednesday, with little optimism of a quick revival in sentiment.

The sustained declines have wiped $50 billion off the value of Australian shares in the first three days trading of the New Year and pushed the Australian dollar to US71.10c in late trading Wednesday.

Wednesday's slide followed a larger than anticipated devaluation of China's currency. Photo: iStock

"Here we are only three days into the new trading year. We've already sold off on the back of a slowing China, we've sold off on the back of a threat of nuclear war out of [North] Korea, and we've sold off on the threat of increasing Middle East tensions," CMC Markets chief market strategist Michael McCarthy said. "That's a pretty busy start to the year."

Wednesday's slide followed a larger than anticipated devaluation of China's currency as the latest move by the Chinese government to take pressure of its economy. It followed a large financial injection into its financial markets on Tuesday after investors were discouraged by steep falls in China's markets earlier in the week.

Late on Tuesday, China signalled it would delay the removal of a ban on the sales of cross holdings by large Chinese investors. The restriction was due to expire at the end of this week.

"It's like the sword of the Damocles, always hanging over your head. The best way is to remove restrictions altogether," Shen Weizheng, fund manager at Shanghai-based Ivy Capital, said.

"I'm disappointed that they continued to use these sorts of quantitative controls," Jorge Mariscal, the emerging-markets chief investment officer at UBS Wealth Management said. "These sorts of measures are going to backfire."

Also hurting sentiment Wednesday was North Korea's latest nuclear test, although the impact here is unlikely to linger.

"When we consider previous cases we don't feel this will have a sustained influence on markets," a Bank of Korea official said. It was North Korea's fourth nuclear test.

More fundamentally, worries over the outlook for the Chinese economy and the slide in its currency, the yuan, continues to erode investor confidence.

CMC's McCarthy said China's economic slowdown – evidenced again on Wednesday by data showing weakness in China's services sector – remained the most serious threat to markets.

"There has not been any shift in the overall fundamental outlook [for markets] other than ongoing investor nervousness," he said.

But the threat posed by further yuan depreciation placing still more pressure on other countries in the region to follow suit may cause more near-term volatility.

"A weaker yuan could initiate other Asian markets to allow their own currencies to weaken to remain competitive with Chinese exports," said Nescyn Presinede, a trader at Manila- based Rizal Commercial Banking Corp. "A continued weakening in the yuan could trigger more volatility in financial markets. Other Asian markets will not stand still from a weaker yuan."

In Australia, shares fell for the fourth day in a row.

The benchmark S&P/ASX200 lost 1.2 per cent to 5123.1, while the broader All Ordinaries fell 1.2 per cent to 5178.3. In the three trading days of 2016, the ASX200 has lost 3.3 per cent or about $50 billion in value.

"We started off fairly flat but we started to pull back after the Chinese sharemarket opened," said Morgans private client adviser Matthew MacDonald. "Oil has pulled back overnight and a lot of the energy and mining stocks are down."

Mr Macdonald said the decision by the People's Bank of China to fix the yuan lower had also negatively affected the market. "The Aussie moved against the US and sometimes when the Aussie moves it has a negative effect on the market."

The People's Bank of China set the reference rate for the currency at 6.5314 to the US dollar, down from 6.5169 the previous day, continuing its recent policy of slowly devaluing the renminbi. The devaluation was only 0.22 per cent, but more than investors had expected.